Landlord tax is an increasing problem for residential property landlords. The 4 main tax related events affecting landlords occur on the purchase, letting and finally the sale of the investment property. The taxes affecting landlords are:
- Stamp Duty Land Tax (SDLT) on the purchase of the property
- Income tax potentially charged on the rental profits from a rental property
- Council tax liabilities – payable when the buy-to-let property is empty
- Capital Gains Tax (CGT) charged on the gains made on disposal of a residential investment property
What are a landlord’s income tax liabilities?
A landlords income tax liability is accessed against a single letting business and therefore expenses and income for individual rental properties are grouped together. Whilst it may be helpful to separate the income and rental profit for individual properties to see how each rental property is performing. The reality is that HMRC is only interested in the overall performance of your rental business as a single entity when accessing a landlords income tax for the year.
Categories of allowable expenses on a rental business
There are 5 categories with which landlord expenses can be grouped under:
Again these are only for convenience and clarity when putting a landlords accounts together. There are no penalties or advantages to a landlord of having more or less expenses grouped in one category as a posed to another.
Legal & professional – Legal services for a remortgage, valuation fees, mortgage broker fees, landlord safety certificate costs, tenancy agreement costs, letting agent fees, admin cost to close a mortgage, membership fees to a professional body
Repair, maintenance & renewals – redecoration costs, appliance repair charges, plumbing, electrical repairs, etc
Rent, rates, insurance, ground rents, etc – landlord insurance, council tax charges, grounds rent
Cost of services provided, including wages – cleaning, meals
Other expenses – Telecom charges, utility bill costs, computer software, advertising costs, computer purchase (if used exclusively for the business – could be accounted as a capital allowance (see section on capital allowances below)
Changes to tax relief for residential landlords
Landlords should be aware following the Finance (No. 2) Act 2015 as amended by the Finance Bill 2016 that from April 2017 the whole tax environment changed so that they are no longer able to offset their entire costs of mortgage finance in the form of loan interest against their rental profits. This benefit was fazed out and replaced instead by a basic rate tax credit. Go here to read more how the tax environment changed for landlords.
How landlords can save tax on their rental profits?
Landlords should remember that tax avoidance is perfectly legal tax evasion is not. Infact you should always be working on your landlord tax saving strategies to keep ahead of the taxman and avoid a tax time bomb. There are many things that a landlord can do to avoid paying penal rates of tax and here are ten ways to save tax. Creative thinking, a planned approach and being aware of the many ways of off setting the legitimate costs of running a rental business. Sometimes it may also be worth paying for quality professional tax advice as a way of structuring your rental business to pay less tax. For some rental businesses it maybe worth incorporating their rental business and use some of the tax advantages that a rise when running a letting business as a company.
What is the deadline for a landlord income tax return?
The tax deadline for any landlord submitting their tax return online is 31st January. The penalty for any late submission is an automatic fine of £100 with ongoing interest surcharges paid on the outstanding tax. To pay their income tax a landlord can go online once they have registered for their HMRC account and can make payment in a number of ways including by BACS providing their have the correct payment reference known as the Unique Tax Reference UTR. There are also a number of other important landlord dates to keep in mind.
How can landlords calculate their tax liabilities?
Landlords can use Property Hawk’s unique free landlord software to calculate their landlord income tax liability. The property management software is easy and free to use and is now used by thousands of UK landlords to manage their residential property portfolios.
Landlord tax return
A landlord should always submitt a tax return even if they don’t think they are making any money. This is because tax losses in their rental business can be off set against future profits. A landlord should keep careful records to avoid tax return errors and then a subsequent tax investigation.
What are the other taxes payable by landlords?
Council tax is now a real bug bear for landlords and me in particular because it no longer makes any sense in any historic or logical manner. Landlords need to go back into the annals of tax paying history. The origins of Council Tax were in it’s much maligned predecessor the Poll Tax which basically was supposed to be charged on individuals and related to the fact that we were all consumers of the local services in the areas where we lived. The Poll Tax was replaced by the Council tax where most landlords received discounts whilst the property was uninhabitable during renovations or empty in between lettings. These discounts have been eroded in recent years as many councils have removed them meaning that landlords are paying more council tax than a tenant who occupying the property as a single person who benefits from a 25% discount. Each local authority have discretion on how they apply the empty property discount as of 1st April 2013.
The other 2 types of landlord tax only a rise on purchase of an investment property or ultimately the disposal of the rental property. When a landlord sells their investment property they may be liable to paying capital gains tax if there is a chargeable gain.
On purchase landlords are likely to be liable to pay Stamp Duty Land Tax (SDLT) on the purchase of any property over £125,000. The table on Stamp Duty Land Tax residential property rates is here.